With their major shareholder calling for the sale of the company, the ousting of their CEO after 18 months on the job, a steady decline in same-store sales, and a recently filed discrimination lawsuit things couldn’t be going worse for teen apparel retailer Wet Seal Inc. (NASDAQ: WTSLA). Any one of the aforementioned issues would likely prove detrimental to a company’s share price but with WTSLA forced to face all of them the question is can they survive.
On Tuesday WTSLA said they were in discussions with Clinton Group, their major stockholder, regarding the use of its capital. Whether WTSLA follows the recommendations of Clinton Group is yet unknown but the hedge-fund manager has made it clear they want the company sold. According to Clinton Group WTSLA could attract an offer in the range of $5 to $8 per share. That may be a bit optimistic considering shares are currently trading around the 2.67 level and haven’t seen $5 since September 2011.
Of course that $5 mark endured a slow decline as then CEO, Susan McGalla, failed to halt the slide over the last 11 months of her tenure. Apparently McGalla had a turnaround plan that was to take between two and three years but the board wasn’t willing to wait. How much pressure Clinton Group put on the board is unknown but according to a WSJ report senior portfolio manager Joseph DePerio described McGalla’s dismissal as, “a good first step,” and said, “I don’t trust this board to make the right decisions to hire a new CEO and to mentor the CEO.”
DePerio had more direct words for the board, saying “We simply cannot wait for the board to hire yet another chief executive — the next one will be the fourth in five years — to embark on yet another change in strategy with the aim of turning around the company. That path is simply too uncertain.”
Clearly there’s little confidence in WTSLA’s direction and for good reason, shares have fallen nearly 50% this year and they have seen same-store sales decline for eleven straight months. Obviously something isn’t going right and the company recently cut its outlook for the quarter ending July 31, 2012. After seeing revenue in same-store locations open at least a year drop 8.8% in May and 9% in June WTSLA is now saying the drop could hit between 13% – 14% through the third week in July.
Aside from the financial problems WTSLA is experiencing the retailer has also been hit with a discrimination lawsuit filed earlier this month by three former employees. According to the plaintiffs Wet Seal discriminated against African-American store management employees, claiming that executives set out to fire African-American employees because they didn’t fit the company’s “brand image.”
For their part Wet Seal has denied the claims but this has done little to improve investor confidence.
The reality is the teen retail market is exceedingly competitive and when a retailer fails to attract their target consumer it becomes extremely difficult to win them back. Whether or not Clinton Group’s pressure to sell becomes a reality should be known soon enough but the likelihood of WTSLA getting the $5 to $8 per share appears a bit far-fetched.
